Assume an Economy Where the Deficit Response Index Is Zero

question 25

Essay

Assume an economy where the deficit response index is zero. If the budget deficit is $85 billion and the multiplier is 4 how much must government spending be cut in order to drive the deficit to zero? What role does the multiplier play in the solution to this problem?

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Definitions:

Active Policy Approach

A strategy where government policies actively seek to influence economic conditions, such as through fiscal and monetary policies, to achieve specific economic goals.

Recessionary Policy

Economic policies implemented to combat recession, often involving increased government spending and decreased taxation.

Aggregate Demand

The entire market's craving for goods and services within an economic territory, calculated at a fixed price level and within a set timeline.

Expansionary Gap

A situation in an economy where the real GDP is higher than the potential GDP, often leading to inflation.